New Delhi: The government is likely to reduce tax exemptions for corporate sector faster than tax rates to help it mop up higher corporate tax revenue next year. This would also assist it to partly meet the demand for higher investment in the economy and wages for its employees, a senior official said, on conditions of anonymity.
He said next year’s budget would continue with the theme of growth revival through higher puÂblic investments. There will be demands of the Seventh Pay Commission to balance this spending with the need to bring down fiscal deficit, therefore more tax and non-tax revenues would be needed. “The promise of bringing down corporate tax rates along with phasing out of exemptions made in this year’s budget should not necessarily result in loss of revenue, it could instead increase the tax mop-up,” the official said.
Corporate income tax accounts are close to one-third of the total tax revenue receipts of the government. This year the corporate tax revenue target is Rs 4.7 lakh crore, while the overall tax collection is aimed at Rs 14.5 lakh crore. The government has proposed to bring down corporate tax rates to 25 per cent from 30 per cent in the next four years with the first cut coming in 2016-17. These cuts will be tied up with withdrawal of exemptions that the companies enjoy.
The argument cited in favour of the cuts is that high corporate income tax rate was bad advertisement for India as an attractive investment destination when compared to its competitors, while offering no advantage to the government. Due to exemptions effective, corporate tax rate is 23 per cent in India, government estimates show.
According to the medium-term targets the government has set for itself, fiscal deficit has to come down to 3.5 per cent in the next financial year from 3.9 per cent in 2015-16. The official said this year’s target would be met, but declined to discuss whether targets for the next year would be reset. The mid-term Economic Review has recommended the recalibration of fiscal deficit targets for this year. The document prepared by the economic division of the finance ministry was placed in Parliament in December 2015.
It said that as the government would need additional resources to allocate more funds for investment and meet the demand for higher wages and pensions, it should have more space to borrow from the market.
“It (higher deficit for next financial year) is their view. The issue has not even been discussed (as part of budget-making process),” he said.
The official said the pay commission award, which will contribute to private consumption demand and higher growth next financial year, would also be positive for revenue collections. Other areas of hope for next year’s budget are crude oil prices that continue to go down. Low oil prices would bring in additional savings on subsidies. These savings were the key driver of higher investment by the government this financial year.
The government has utilised the headroom available, due to lower crude prices, to increase excise on petroleum products seven times since November 2014.
On petrol, excise now stands at Rs 7.73 a litre while in diesel it has been raised to Rs 7.83 a litre. While this year extra excise mop from auto fuels would be around Rs 30,000 crore because increases were spread out, for the next financial year, the government would be gaining by around Rs 1 lakh crore.
Next year, the benchmark for crude prices while calculating subsidies could be kept at $50 a barrel as against $70 a barrel this year, the official said. This could create space for the government at the start of the financial year itself to allocate more money for investment and less on petroleum subsidies.
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